Unveiling Financial Scandals: Catalysts for Sarbanes-Oxley Act and its Global Impact - Essay Sample

Introduction

SOX became a law is 3oth July 2002 for security and exchange commission that oversees operations within organizations. In the early 2000s, there were financial scandals that required immediate approach thus initiating the enactment of the Sarbanes-Oxley Act of 2002. Companies such as Tyco international plc, Enon Corporation and the WorldCom international company had scandals that involved financial management and administration for efficiency of operations in the United States. The aim of the SOX was to ensure that investors are able to restore their confidence in financial markets and ensure that there are no loopholes that were used by companies to defraud investors who are willing to join the financial markets. This research paper seeks to analyze the financial scandals by Enron and WorldCom in the early 2000s that led to the enactment of the SOX cat of 2002 and how SOX is regarded in ten current economies of the world.

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Scandals by WorldCom and Enron Corporation

In the late 2000s, there are companies in the United States that practiced fraud in the financial markets thus making it difficult to increase investment within the economy. Investment depends on the kind of impression that investors get within a financial market and the openness of operations within an economy. Companies such Enron and WorldCom had practices that did not promote investment in the economy of the United States thus making is a necessity to initiate an act that could help in solving financial scandals between companies and investors. WorldCom and Enron had accounting standards making financial management difficult thus affecting the relationships between companies and their investors. The scandal by WorldCom was one of the most shocking thus leading to the enactment of the SOX cat to help in financial administration. Being the world’s largest telecommunication companies and a core dividend paying stock company, WorldCom decided to inflate the earnings in its loss and profit statements by almost $4 billion so that they could be able to attract investors and defraud them off their investment. This step by WorldCom affected its balance sheet, its fork 10-k filing, the income statement and the annual report of the company’s performance. WorldCom carried out the fraudulent accounting to its investors and the economy investors through the machination of upper management.

The scandal by WorldCom was similar to the financial accounting scandal by Enron Corporation. Enron is an American energy company that is located in Houston, Texas. In the United States, the SOX legislation employed the public accounting organizations as well as board of management in the public sector and this practice was absent in Enron Corporation. There are a series of events that led to the bankruptcy on the Enron energy firm in the United States to an extent that it started malpractices in the accounting department with an intention of manipulating its investors. Enron Company reached a dramatic height and later faced a dizzying fall. At peak, the company had shares worth $90.75 but later declared it was bankrupt in 2nd December 2001 when it was trading at6 $0.26 of its shares to the public. Despite the fall, leaders in the company managed to fool regulators for a long time to an extent that they started using fake holdings accounting that were off the books. Enron used special purpose vehicles to hide its debt mountains and toxic assets from prospective debtors and investors. The company paid its creditors more than $21.7 billion up to 2011 from 2004 thus making it bankrupt. This fall made it necessary to enact the SOX legislation to ensure that other companies do not experience the same and protect investors from being defrauded.

Requirements for SOX legislation

The leaders that proposed for the enactment of the SOX act decided to put in place legal requirements to ensure that there is an informed practice within companies in terms of financial management and administration especially when dealing with investors. The SOX Act has introduced significant changes in financial accounting, corporate governance, and financial practice towards benefiting the public and shareholders. This act has extended protection from fraudulent practices within the financial sector of the economy thus making the economy fraud free and easy for investment. The requirements in the legislation include;

Providing Reports

Financial reports are essential for effectiveness in a company. The SOX legislation stipulates that reports on the accounting procedures and processes are important so that it can be easy to trace the performance of an organization. Compliancy reports are also necessary as stipulated by the SOX act since it makes it easy to evaluate, analyze, and note the we4aknesses within the finance department of a company.

Regular Access of Financial Records

Organizations are required to ensure that they have analyzed the effectiveness of their financial systems. The legislation enacted by leaders seeks to ensure that companies have strong financial systems that enable them to carry out ethical financial engagements especially when dealing with investors and other companies that are willing and able to conduct business. The legislation seeks to evaluate and access the financial controls of a company to ensure that they do not participate in fraudulent activities within an economy.

Transparency among Accounting Personals

Accounting section of a company is like a backbone that determines how a company performs. Section 302 if the SOX act tries to give reasons why transparency is an essential aspect in the overall operations within an organization. These sections states that an organization has to design “such internal controls to ensure that material information relating to the issuer and its consolidated subsidiaries is made known top such officers within the financial department.” It is essential to ensure high level of transparency when dealing with financial statements and other forms of activities within the financial department.

In summary, SOX has been of help in the financial industry since it has enabled several economies to improve since its enactment. SOX ensures te presentation of has proved its significance in the accounting industry, whereby several economies have improved since its implementation. This is because the SOX ensure the provision of precise and accurate financial statements, disclosing all the required information that both the public and investors deem vital for their decision-making processes. As seen in this paper, SOX encourages transparency of the organization's financial performance through prohibiting fraud and illegal activities that mutual fund managers are likely to engage in. Therefore, the act’s adoption is of a positive influence to owning and operating a healthy business entity.

References

Act, S. O. (2002). A guide to the Sarbanes-Oxley Act. Versión de, 13.

Koehn, J. L., & DelVecchio, S. C. (2006). Revisiting the ripple effects of the Sarbanes-Oxley Act. The CPA Journal, 76(5), 32.

Sarbanes, P. (2002, July). Sarbanes-oxley act of 2002. In The Public Company Accounting Reform and Investor Protection Act. Washington DC: US Congress (p. 55).